XCC(80)137
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developers, it should be allowed to develop a number of sites which would have a significant railway content. However, the land acquisition costs in Table 3 exclude the Crown land premia payable for such sites. Also excluded from Table 3 are costs associated with the redevelopment of private lots in which railway structures would have to be incorporated under arrangements to be negotiated directly by the MTRC with the owners! Proposals for property development associated with the Island Line project are further discussed in paragraphs 30 to 38 below.
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It was against this background that the MTRC was asked whether it considered that the necessary loan finance could be raised on satisfactory terms. The Corporation replied in the affirmative, but with this qualification: the additional capital expenditure to be incurred on the construction of the Island Line would, even after taking account of a conservatively estimated contribution of $2 billion from property development, so increase the debt/equity gearing of the Corporation that it would be left very vulnerable to any cost overruns and/or revenue shortfalls, particularly during the first few years of the Island Line's operation. It is estimated that, without any additional equity, but after allowing for property development profits of $2 billion, the debt servicing charges of the Corporation would be equal to more than 70% of the total cash outgoings in respect of the Island Line and, during the early operational years, would exceed revenue. The significance of debt servicing charges on account of the Island Line looming so large in the Corporation's costs is deepened when it is remembered that interest charges are, to a very large extent, outside the Corporation's control (and, together with the rather lower than expected build-up of patronage on the MIS, is presently a cause of concern to the Corporation). It is, therefore, the considered view of the Board of the Corporation that the additional capital expenditure that would be incurred in building an Island Line would merit a further substantial equity injection in the form of cash from the MTR Fund. The Financial Secretary agrees, and he and the Chairman of the MTRC are now discussing how best to determine the level of that cash injection. The assumed capital contribution from property development is $2 billion, but this has been calculatedona very conservative basis as the future trend of property development profits is difficult to forecast. Should favourable conditions prevail then this contribution could double to $4 billion. The Board of the Corporation would prefer to limit borrowings for the Island Line to contract related loans obtained from Exim authorities at subsidised and fixed rates of interest. In that event, the total capital contribution required from property development profits and any additional equity injection would amount to $5.5 billion. In these circumstances, the additional amount of equity capital required could vary between $1.5 billion and $3.5 billion. The following table summarises the financial implications for the Corporation of adding the Island Line to the present system, assuming such a capital contribution of $5.5 billion:
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CONFIDENTIAL